Budget Exercises - Part I (Model Answers) PDF

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Chapter 07 – Exercises – Part I – Model Answers Exercise one: Sioux Company is estimating the following sales for the first six months of next year:

January ...... February .... March ........ April .......... May ...........

$250,000 $220,000 $240,000 $300,000 $360,000

Sales at Sioux are normally collected as 60% in the month of sale, 35% in the month following the sale, and the remaining 5% being uncollectible. Based on this information, how much cash should Sioux expect to collect during the month of April? A) $250,800 B) $264,000 C) $290,700 D) $306,000 Answer: B Solution:

April sales ($300,000 × 60%) ............. March sales ($240,000 × 35%) ........... Total ....................................................

$180,000 84,000 $264,000

Exercise Two: All of Gaylord Company's sales are on account. Thirty-five percent of the credit sales are collected in the month of sale, 45% in the month following sale, and the rest are collected in the second month following sale. Bad debts are negligible and should be ignored. The following are budgeted sales data for the company:

Total sales..............

January February March April $50,000 $60,000 $40,000 $30,000

What is the amount of cash that should be collected in March? A) $39,000 B) $37,000 C) $27,500 D) $51,000 Answer: D Solution:

March sales ($40,000 × 35%) ............. February sales ($60,000 × 45%) ......... January sales ($50,000 × 20%*) ......... Total .................................................... *100% − 35% − 45% = 20%

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$14,000 27,000 10,000 $51,000

Exercise Three: Betz Company's sales budget shows the following projections for next year:

First Quarter ...................... Second Quarter .................. Third Quarter ..................... Fourth Quarter ...................

Sales in units 60,000 80,000 45,000 55,000

Inventory at the beginning of the year was 18,000 units. The finished goods inventory at the end of each quarter is to equal 30% of the next quarter's budgeted unit sales. How many units should be produced during the first quarter? A) 24,000 B) 48,000 C) 66,000 D) 72,000 Answer: C Solution:

Units produced = Ending inventory + Units sold + Beginning inventory = (30% × 80,000) + 60,000 − 18,000 = 24,000 + 60,000 − 18,000 = 66,000

Exercise Four: The following information relates to Minorca Manufacturing Corporation for next quarter:

Expected sales (in units)............................ Desired ending finished goods inventory (in units) .................................................

January February March 440,000 390,000 400,000 28,000

30,000

How many units should Minorca plan on producing for the month of February? A) 360,000 units B) 388,000 units C) 392,000 units D) 420,000 units Answer: C Solution: Ending inventory + Units sold − Beginning inventory = 30,000 + 390,000 - 28,000 = 392,000

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35,000

Exercise Five: The following are budgeted data:

Sales in units ..................... Production in units ............

Month 1 Month 2 Month 3 15,000 20,000 18,000 16,000 22,000 15,000

One pound of material is required for each finished unit. The inventory of materials at the end of each month should equal 20% of the following month's production needs. At the beginning of Month 1, 3,200 lbs. of materials were on hand. Purchases of raw materials for Month 2 would be budgeted to be: A) 17,600 pounds B) 23,400 pounds C) 20,600 pounds D) 25,000 pounds Answer: C Solution:

Materials purchased = Ending inventory + Materials used − Beginning inventory = (20% × 15,000) + 22,000 − (20% × 22,000) = 3,000 + 22,000 − 4,400 = 20,600 Exercise Six: Garry Manufacturing Corporation's most recent production budget indicates the following required production:

October Required production (units) .......... 210,000

November 175,000

December 110,000

Each unit of finished product requires 5 pounds of raw materials. The company maintains raw materials inventory equal to 25% of the next month's expected production needs. How many pounds of raw material should Garry plan on purchasing for the month of November? A) 1,006,250 B) 793,750 C) 1,012,500 D) 893,500 Answer: B Solution:

Materials to be purchased = Ending inventory + Materials to be used − Beginning inventory = (25% × 110,000 × 5) + (175,000 × 5) − (25% × 175,000 × 5) = 137,500 + 875,000 − 218,750 = 793,750

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